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Cross-border: How COVID-19 could affect the aviation industry’s commitments to CORSIA

Cross-border: How COVID-19 could affect the aviation industry’s commitments to CORSIA

Published

Jun 17 2020

Written By

Leo Fattorini

Partner
Singapore

Simon Phippard

Of Counsel
UK

This article serves as an update to our previous briefing published in May 2020 where we reviewed the challenges presented to the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) by the COVID-19 crisis.

Introduction

June 2020 proves to be a pivotal month for the aviation industry and environmentalists alike with the International Civil Aviation Organisation (ICAO) Council meeting in Montreal for their 220th Session spanning 8 June to 26 June.

During this meeting a decision will be made as to whether or not to adjust the CORSIA baseline - currently defined as the average of CO2 emissions from international aviation covered by CORSIA for the years 2019 and 2020. Under the CORSIA scheme only emissions in excess of this baseline will need to be offset, and thus a baseline with more tonnes of CO2 will result in lower financial obligations by airlines in the future.

We outline below some of the background and pressures behind the decision that the Council will have to make, together with its potential implications.

Reasons for adjusting the baseline calculation

Skewed average:

The continuing national lockdowns, border closures and travel restrictions due to the COVID-19 pandemic have severely impacted the aviation industry with airlines grounding a significant portion, if not all, of their fleet and flying only a fraction of their usual routes. It's plain that this unnatural and forced reduction in aircraft movements is resulting in a substantially reduced level of aircraft CO2 emissions in 2020. This in turn affects the calculation of the baseline level for CO2 emissions within the present CORSIA framework. If the actual CO2 levels in 2020 were to be factored into a baseline calculation, this would create an artificially low benchmark against which future emissions are compared, thus leading to much higher future liabilities for airlines that, under CORSIA, will have to acquire credits to offset future emissions levels over the benchmark.

Industry pressure:

In April 2020, the International Business Aviation Council (IBAC) cited in a letter to ICAO how the increased costs resulting from an overly stringent metric would compound the already challenging recovery circumstances for the aviation sector and urged ICAO to use only 2019 emissions to establish the baseline. Similarly, the International Air Transport Association (IATA) issued a position paper in May 2020 recommending the same, expressing that this solution was "a pragmatic and simple way to mitigate the extraordinary and unforeseeable impacts of the COVID-19 crisis on CORSIA."

Earlier this month, it was reported that pressure to amend the baseline came from the United States via a virtual ICAO meeting, and from the Latin American Civil Aviation Commission in a letter to the ICAO Council's President. The Federal Aviation Administration (FAA), in support of a revised baseline, has described the current situation in the absence of any amendment as an unanticipated and disproportionate (yet wholly avoidable) economic impact.

Tellingly, this was shortly followed by the European Union (traditionally strongly in favour of environmental constraints on the aviation industry) deciding that it and its Member States should accept that 2019 be taken as the baseline period, declaring it as "the closest possible proxy based on real data".

With so many institutions and jurisdictions joining ranks in appealing to ICAO to adopt a pre-pandemic baseline, the Council is under a great deal of pressure to make the changes requested by the industry. On its website, ICAO responded to the concerns raised indicating that the Council will "consider the legal and reputational aspects related to the various options, as well as the importance of maintaining the originally-agreed balance between the scheme's economic impacts and environmental benefits together with its simplicity and practicality, whilst responding to this unprecedented crisis."

Other considerations

Recovery rate:

Industry analysts have predicted that it will take years (perhaps four or five) for the aviation industry to recover to pre-pandemic levels. If correct, these forecasts of the recovery rate would likely mean that a 2019-only baseline would lead to little or no offsetting requirements at all during the initial pilot phase.

During the recovery period, the industry will need all the support it can get from governments and international institutions if many more airlines are not to fail.

With the impact of COVID-19 likely to impact airlines for years to come, many in the industry have argued that the increase in compliance costs arising from an un-amended CORSIA baseline could be enough to see more airlines move into bankruptcy in future, and maybe even persuade a number of countries to opt out of CORSIA's voluntary stage altogether. This, together with the likely outcome of those countries which have not yet signed up continuing to opt out, threatens to undermine the scheme itself.

Availability of credits:

A further pressure relates to the availability of offset carbon credits themselves. In our previous briefing we highlighted concerns that there may not be enough credits to meet the demands of the pilot phase should more onerous offsetting requirements kick in. As an update, ICAO's Technical Advisory Body (TAB) has since progressed to inviting the public to submit their comments on a further 10 emissions unit programmes, latest by 26 June 2020, as part of the assessment cycle for ICAO's second call for programme applications.

Despite efforts being made to make more credits available, the tradeability of credits as commodities may still lead to high demand and a hefty price tag, consequently causing further disproportionate financial impact on aircraft operators. A number of organisations (other than airlines) have been stockpiling credits pending airlines' requirements being crystallised – at which point they hope to sell them at inflated prices.

Conclusion

At the time of writing, it remains to be seen which course the ICAO Council will take. The airline industry is currently on its knees. The Council would be potentially foolhardy not to listen to the pleas of carriers and industry bodies to recalibrate the baseline. Without such an adjustment, the argument is that the industry is compelled to achieve a greater level of carbon offsetting than CORSIA originally envisaged, at a time when it can ill afford to do so.

On the other hand, the industry is also acutely aware of the need to change its perception as one that contributes significant to climate change. And of course there is plenty of pressure from environmental groups for the CORSIA baseline to remain unchanged. Indeed, one body has argued that the scheme contains sufficient flexibility to mitigate much of the effect of using actual 2020 emissions during the pilot phase, that the Council does not have the authority to make a change without General Assembly approval, and that the issue does not need to be considered until the next General Assembly in 2022.

Overall CORSIA remains an initiative supported by airlines and regulators, and one which it has taken many years to craft in a way acceptable to the majority of the world's developed aviation nations. Nobody could have foreseen the impact of COVID-19 on airlines but the industry needs to be careful not to cast aside perhaps its best chance to rebuild in a manner which allows for sustainable growth without unwelcome constraints arising from national or regional environmental taxes.

For instance, if CORSIA fails, the EU will no doubt re-start the clock on the Emission Trading System (ETS), regarded by many as a more stringent regime than CORSIA. Already COVID-19 has led some nations to adopt unilateral approaches to their national airlines, in some instances making government financial backing conditional on sustainability initiatives.

In this context, unless the Council supports the changes requested by the airline industry, the whole CORSIA scheme may fail - which would arguably not be in any stakeholder's best interests.

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Aviation & Aerospace Airlines

Cross-border: How COVID-19 could affect the aviation industry’s commitments to CORSIA

Published

Written By

Introduction

Reasons for adjusting the baseline calculation

Other considerations

Conclusion

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